Best Efforts

What does 'Best Efforts' mean

Best efforts is an agreement in which an underwriter promises to make a full-fledged attempt to sell as much of a securities offering, such as an initial public offering, as it can to the public. Best-effort agreements are used mainly for securities with higher risk, such as unseasoned offerings, or in less-than-ideal market conditions.

BREAKING DOWN 'Best Efforts'

Best efforts relieve underwriters from responsibility for any unsold inventory if they are unable to sell all the securities. The underwriter does not guarantee that it will sell the entire IPO issue in a best-efforts agreement. Such an agreement limits the underwriter's risk, but also potentially limits the underwriter's upside, because it receives a flat fee for its services.

Less Risky Approach

In a best-efforts offering, the investment bank acts as an agent. In this type of relationship, it merely tries to do its best to sell the issue. The investment bank does not buy outright the securities that are to be sold to the public. Instead, the bank has an option to purchase only those shares that are sufficient to meet the demand from clients. Alternatively, the bank can cancel the entire issue and give up the fee.

There can be conditions attached to a best-efforts offering. This includes all-or-none or part-or-none, which requires that either the entire offering be sold, or that a certain amount of securities be placed in order for the deal to close. Under the Financial Industry Regulatory Authority's (FINRA) SEA Rule 10b-9, the investors' funds must be returned promptly in the event a contingent sale falls through.

Best Efforts vs. Firm Commitment

Underwriters and issuers can handle public offerings in different ways. In contrast to a best-efforts agreement, a bought deal, also known as a firm commitment, requires the underwriter to purchase the entire offering. The underwriter's profit is based on how many shares or bonds it sells, and on the spread between the discounted purchase price and the sale price of the shares to the public.

Example

In September 2015, Aperion Biologics, Inc. filed an offering statement on Form 1-A with the Securities and Exchange Commission (SEC) to sell $20 million in an initial public offering. WR Hambrecht+ Co. was the agent that was going to sell the shares, using best efforts.

Aperion is a small company that qualified as an emerging-growth company, defined in the Jumpstart Our Business Startups Act (JOBS). For the latest fiscal year, which ended on Sept. 30, 2015, revenue was just $34,000. In light of the company's small size, WR Hambrecht chose a best-efforts offering to minimize the risk that it would not be able to sell the deal in a firm commitment underwriting.

The latest filing, in January 2016, registered 3.1 million shares, and the proposed price range was $7 to $9. The company has not yet gone public, as of July 2016. The shares will be offered on an all-or-none basis.